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The Financing Discussion with Your Banker…What to Expect

As you probably know, banks aren’t really looking to take much risk right now. There’s money available but it’s not so easy to get for a solar project. As the old saw goes, you have to prove you don’t need the money before a bank will lend it to you.

For solar projects, lenders are looking for several things – an ongoing, viable business that generates significant free cash flow to service the debt. No difference there compared to financing a machine for your business. But with solar, they are also demanding forward SREC sale contracts with strong counterparties. Personal guarantees from the owner of the business are almost a given. And many customers are surprised to find that lenders assign virtually no collateral value on the systems that cost so much money.

There are several reasons for the negligible collateral value of solar systems:

A percentage of the cost of a solar system is ‘soft costs,’ meaning the design, engineering, permitting and labor. Additionally, it is unlikely that a lender would be able to realize any value in the conduit, wire, combiner boxes, etc., that make up the balance of the system. Should the bank repossess the assets that make up your system, those costs are all gone. Figure at least 40% of the system cost.

Solar systems are very incentive-oriented. Once installed, the 30% federal tax credit (or grant) is used up. That means, at best, the assets are worth no more than 70% of what they were prior to being installed because of the tax credit.

Manufacturers’ warranties are generally limited to the first installation only, so they will not transfer to subsequent users, further diminishing the liquidation value.

Most importantly, there is no established, liquid secondary market for solar equipment. At some point there will be, but probably not for some time. There are few solar integrators who would bother with used equipment so there are no buyers for used equipment.

All in all, if a lender gives you 15% in the underwriting process for collateral value of the solar equipment, you’re doing well.

What should you do? Assemble 3 years of audited financials. Discuss your plans with your banker – not just the relationship manager but also the underwriting folks. Get a feel for how they feel about lending for solar. It’s been our experience that a number of lenders simply don’t understand the moving parts of a solar project and that makes them shy away from them.

Solar projects are complex. The financing discussion is critical. Banks make money by lending money, their customers grow their businesses by borrowing money. There are common goals here. Have patience, seek assistance from your solar integrator if they can provide it. The good ones can offer significant assistance.